The Fiscal Cliff X-Factor: The Debt Ceiling

October 18, 2012

Ezra Klein has an important piece this morning, detailing what he believes the administration’s strategy is for dealing with the fiscal cliff after the election (assuming, of course that President Obama is gearing up for a second term, not a new presidential library).

In short, according to Klein, the White House believes it has major leverage heading into this showdown with Republicans. Since inaction means automatic spending cuts that slash the defense and non-defense budgets equally, but exempt Medicare, Medicaid and Social Security (Republicans don’t like this) and also the full expiration of the Bush tax cuts (Republicans really don’t like this), Obama will use that leverage to get a big bipartisan deal that not only executes his tax and spending preferences but much more. Writes Klein:

The administration hopes this deal will include more than just deficit reduction. They also see it as a vehicle for infrastructure investment and tax reform. They think there’s some chance that parts of the American Jobs Act, like the hiring tax credits, could sneak through the door, too. There’s even talk of using it to address climate change, though everyone agrees that’s unlikely. Whatever ends up in the final deal, there’s little doubt that it will be a big deal, and it’s likely to come together fairly quickly in the first year. The White House—and the expiring tax and spending provisions—won’t give Republicans any other choice.

In a way, the Obama administration’s plan for a second term is much like their plan for the first term: make a deal with Republicans. Get a big bipartisan solution to our problems. But the means are almost precisely the opposite. Where in the first term, the hope was that they could reach out, talk through the issues and come to an agreement, the plan for the second is to push the Republican Party off the fiscal cliff, and then force them to reach out in order to get pulled back up.

This is basically a budget, as David Dayen points out. And one the White House thinks it can mold into something roughly in line with its preferences, given all the leverage the administration believes it has.

But there is one wrinkle here that Klein doesn’t mention: we’re going to hit that pesky debt ceiling again in either late December or early January. And if Republicans take it hostage again, the White House may be in for much stickier negotiations than it currently anticipates.

House Speaker John Boehner has already said this year, in a speech at the Peter G. Peterson Fiscal Summit, that he likes this course of action. “We shouldn’t dread the debt limit,” he said. “We should welcome it. It’s an action-forcing event in a town that has become infamous for inaction.”

And just this week, Senators Orrin Hatch and Jeff Sessions fired off a letter to Treasury Secretary Timothy Geithner demanding to know when exactly the debt limit would be reached, and rather ominously, “asked Geithner to lay out what contingency plan, if any, exists for a situation in which the debt limit is not raised in time.”

Will Republicans, being squeezed by the White House into a fiscal cliff deal they don’t like, strap themselves with the debt-ceiling grenade and threaten once again to pull the pin unless they get better terms? They’ve done it before, and this is their only real leverage here—in this case, inaction means catastrophic default, which the White House naturally needs to avoid.

There are ways around this—the White House could exercise a constitutional reach-around of the debt ceiling. (Nancy Pelosi advocated that option this summer, should it be needed.) Or it could just bully the Republicans—who would potentially be politically weak, coming off a November loss—for trying to blow up the economy, and hope they backed off. (If we hit the fiscal cliff, the long-term debt outlook dramatically improves, taking away a crucial GOP talking point, as Klein has noted in the past. But we still hit the debt ceiling.)

Either way, this is going to be a really wild ride. And perhaps not as easy as the White House thinks.

Doug Henwood writes about Washington Democrats' "lack of spine" in the latest issue.